Conforming Loan Limit Changes Coming in 2014, But Later Than Expected

Conforming loan limit changes are expected in 2014, but not right away. Federal regulators originally planned to lower the conforming loan limits at the start of 2014. But according to recent statements from Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), the change could now be delayed until next spring or summer.

What Are Conforming Loan Limits?

A “conforming loan limit” is the maximum size for loans that can be purchased by Fannie Mae or Freddie Mac, the government-controlled corporations that buy and sell mortgages in the secondary market. Home loans that are equal to, or less than, these limits are referred to as conforming loans.

Currently, Freddie Mac and Fannie Mae will purchase mortgages up to $417,000, or up to $625,500 in certain pricey markets like San Francisco and New York City. But those limits will be changed sometime in 2014.

After the housing market crashed, Fannie and Freddie were placed into conservatorship. This means Uncle Sam now manages their affairs. Specifically, it is the Federal Housing Finance Agency that calls the shots for the two government-sponsored enterprises (or GSEs), as they are known. The FHFA also sets the maximum size limit for loans that can be purchased by the two GSEs. This agency has the unilateral authority to change the conforming loan limits for 2014.

Lower Limits Coming in 2014

FHFA officials previously announced they would lower the conforming limits for loans purchased by Fannie Mae and Freddie Mac, and that the change would occur in January 2014. Last month, an FHFA spokesperson said that a “gradual reduction in loan limits is an appropriate and effective approach to reducing taxpayer’s mortgage risk exposure,” adding that additional details would be forthcoming.

These changes would be a departure from the usual pattern. In the past, federal regulators have typically raised the limits each year. The forthcoming reduction is indicative of a growing desire among some politicians to reduce the government’s role (and taxpayer exposure) in the mortgage market. It is also part of President Barack Obama’s broader plan to overhaul the housing finance system by winding down the GSEs.

Back in August, President Obama called for a decrease in conforming loan limits, as the first in a series of steps designed to reduce the government’s “footprint” in the housing market. A housing fact sheet released by the White House earlier this year stated the following:

“HUD and FHFA should closely examine using their existing authorities to reduce loan limits further consistent with the pace of the recovery, market developments, and the Administration’s principles and transition plan for housing finance reform.”

One of the long-term goals for housing reform, according to the Obama administration, is to “end Fannie and Freddie as we know them.” The administration feels that private capital should have a larger role in the mortgage market, while the government’s role should be reduced. Lowering the GSE purchase limits would be a small step in that direction.

Changes Delayed Until Spring or Early Summer

The conforming loan limit changes were originally scheduled to occur at the first of the year, as they have in the past. FHFA officials previously stated they would reduce the maximum purchase amounts on January 1, 2014. This announcement drew harsh criticism from the real estate and mortgage industry (read: NAR and MBA), and even from some members of Congress.

As a result of this backlash, FHFA is now postponing the conforming loan limit changes until later next year. At this point, they probably won’t take place until the spring or summer of 2014.

The Home Buying Institute supports this move to delay the loan limit changes. The mortgage industry is already facing a bundle of new rules and regulatory changes, most of which take effect in January 2014. Throwing another wrench into the works right at the start of the year would cause major disruptions within the lending industry, and could reduce the flow of credit to qualified borrowers. This would come at a time when the housing market is still in an early recovery phase.

Edward DeMarco, acting director at the FHFA, acknowledged this in comments he made last week. “We needed more time,” he said, referring to the agency’s decision to postpone the changes. “The [mortgage] industry had an awful lot going on on January 1. The better course was to wait.”

FHFA typically announces these changes six months before their implementation date, to give mortgage lenders a chance to adjust their procedures, paperwork, software, etc. And here it is November, and they still haven’t announced the date or the amount by which the limits will be lowered. Bottom line: Don’t expect any conforming loan limit changes at the start of 2014. They probably won’t take effect until May or June, at the earliest.

How It Affects Home Buyers

Home loans that exceed Fannie Mae’s and Freddie Mac’s conforming limits are referred to as jumbo loans. Generally speaking, it’s easier for borrowers to qualify for conforming loans than their jumbo counterparts (which are not backed by the government).

Jumbo borrowers typically have to put more money down and have additional “cash reserves” in the bank at closing. Credit score and debt-to-income requirements are generally stricter for jumbo mortgages, as well. Lenders are generally exposed to more risk with the jumbo products, so they often impose more stringent requirements on borrowers.

As a result of these distinctions, the conforming loan limit changes expected in 2014 are relevant to most borrowers — especially those who plan to purchase homes at or near the current limits.

Won’t Affect FHA Loans

The conforming loan limit changes coming in 2014 will not affect mortgages that are insured by the Federal Housing Administration (FHA). It’s a common misconception that FHA loans fall into the “conforming” category. But they do not. In reality, the FHA program has its own size limits that are distinct from those applied to Fannie and Freddie purchases. FHA limits are established by the Department of Housing and Urban Development (HUD) and vary by county, ranging from $271,050 to $729,750.

The lower limits for conforming loans may actually drive more borrowers to the FHA program. This program is already popular among first-time home buyers, as well as those with limited down-payment funds. Lower limits on the Freddie Mac and Fannie Mae side could lead to higher usage of FHA-insured loans. It’s just one of many reasons 2014 will be an interesting year for the mortgage industry.